L3Harris Technologies (NYSE:LHX) is entering its leadership transition with an emphasis on operating execution rather than further portfolio reshaping, according to Chief Financial Officer Ken Sharp.
Speaking at a Morgan Stanley aerospace and defense conference, Sharp said new Chief Executive Officer Sam has inherited what management views as a strong collection of businesses following the combination of L3 and Harris, two strategic acquisitions and roughly 13 divestitures over the past four to five years.
Sharp said the new CEO brings a detailed operational focus to the role, having previously overseen about 80% of the company’s business. He said the CEO is now getting further acquainted with the missile operations and customer base.
Tactical radio demand and software capabilities
Sharp highlighted the company’s tactical-radio franchise, describing its software-defined radios as a differentiated offering for communications in contested environments. He said the radios can receive software updates to change waveforms and address threats such as jamming without requiring changes to hardware.
The company is preparing refreshes for its Falcon radio products, including Falcon IV for domestic customers and Falcon III for international customers, Sharp said. Development priorities include reducing size, managing heat, extending battery life and increasing communications capacity.
International demand has been a significant driver for the radio business, Sharp said, adding that international sales across L3Harris have increased by about 250 basis points over the past year or couple of years. He said supply-chain issues involving a lower-tier supplier could create “bumps in the road,” but management expects good growth exiting the year and into the following year.
Sharp also pointed to budget signals for next-generation command-and-control, the Handheld, Manpack and Small Form Fit program, and the Marine Corps as supportive of demand. He said L3Harris received its first next-generation command-and-control order and views it as its fair share of the opportunity.
The company is developing Wraith Shield, a software application intended to work with its radios to network battlefield communications, detect drones and enable radio-frequency jamming. Sharp said L3Harris funded the product with its own research-and-development spending rather than responding to a customer request for proposals.
Wraith Shield remains in development and has not yet generated its first sale, Sharp said. The company is working with U.S. Special Operations Command and has demonstrated the capability, which it expects eventually could be integrated with its VAMPIRE counter-unmanned aerial system.
“There’s no RFP for Wraith Shield that exists,” Sharp said. “We built a better product, and then we go and demo it and explain it to the customer why they need it.”
ISR and space opportunities
Sharp said L3Harris’ intelligence, surveillance and reconnaissance business has strong backlog, awards and pipeline activity. The portfolio includes aircraft, space, cyber and maritime operations, with the maritime business expected to accelerate as its products are installed later in ship construction cycles.
In space, Sharp cited the company’s work on missile warning and missile tracking, including programs associated with the Golden Dome initiative. He said L3Harris was the only prime contractor to launch a satellite that worked and the only prime to win all five referenced tranches. The company has about 70 satellites in production, he said.
Sharp said the company’s satellite payload capabilities are differentiated, while noting that satellite programs require careful execution. L3Harris is booking margins below bid levels on certain programs, he said, using an example of booking a 10% margin on a program bid at 15% until the company earns the higher return through performance.
The company also modifies aircraft for ISR missions, often acquiring business-jet-sized platforms and installing electronics and mission systems. Sharp said this approach can create revenue lumpiness and temporarily dilute margins because of the aircraft purchase cost, but it gives L3Harris more control over supply-chain and aircraft-condition risks.
Capital priorities and organization
Sharp said investment in the business remains L3Harris’ top capital-allocation priority, citing company-funded development work and more than $2 billion spent ahead of contract to expand missile capacity. He said the company repurchased $525 million of shares in the first half of the year.
The company also has approximately $1.8 billion of debt maturing, which could lead to some debt repayment, he said. Sharp said L3Harris has increased its dividend for 24 years and intends to maintain its focus on dividend growth.
Large-scale acquisitions appear less likely in the near term. Sharp said management believes it must “earn the right” to pursue major M&A and is focused instead on execution and running its existing portfolio. He added that share repurchases are attractive at what he described as a 13-times multiple, compared with potentially acquiring businesses at much higher earnings multiples.
Sharp also said management does not plan to reorganize or re-segment the company following the CEO transition. He said another organizational change could distract teams from performance, capital-expenditure projects and research-and-development priorities.
On competition and government interest in dual sourcing, Sharp said L3Harris welcomes a level playing field and believes its products can compete on capability and manufacturability. He characterized the company’s “Trusted Disruptor” strategy as a culture of making investments ahead of customer requirements while combining that risk-taking with manufacturing capacity, technical expertise and capital resources.
About L3Harris Technologies (NYSE:LHX)
L3Harris Technologies, Inc is a global aerospace and defense technology company that develops products and systems for government and commercial customers. Its offerings support communications, intelligence, surveillance and reconnaissance, electronic warfare, space operations, missile defense, and other mission-critical applications.
The company provides tactical radios and networking equipment, secure communications systems, sensors, avionics, electronic warfare solutions, space payloads and platforms, and related command-and-control technologies.
